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Saturday, March 2, 2019

There may be banks that are too big to be allowed to fail, but don’t fear that the behemoths of the digital revolution are too big to be regulated. It won’t be long before Google and Facebook cease to be laws unto themselves.

It’s the old story: the lawmakers always take a while to catch up with the innovators. But there are growing signs that governments around the developed world – particularly in Europe and Britain - are closing in on the digital giants.

And here in Australia, the Australian Competition and Consumer Commission is busy with the world’s most wide-ranging inquiry so far, which will report to the newly elected federal government in June. The commission’s boss, Rod Sims, gave a speech about it a few weeks ago, and another this week.

Sims says the commission’s purpose is “making markets work” by promoting competition and achieving well-informed consumers, so as to deliver good outcomes for consumers and the economy.

With this inquiry into the operations of “digital platforms”, he acknowledges that they have brought huge benefits to both our lives as individuals and our society more broadly.

“They are rightly regarded as impressive and successful, and very focused, commercial businesses. Google and Facebook are rapidly transforming the way consumers communicate, access news, and view advertising,” Sims says.

Each month, he says, about 19 million Australians use Google to search the internet, 17 million access Facebook, 17 million watch content on YouTube (owned by Google), and 11 million double tap on Instagram (owned by Facebook, along with WhatsApp).

The inquiry has satisfied itself that this huge size gives the two companies considerable “market power” – ability to influence the prices charged in certain markets.

“However,” Sims says, “being big is not a sin. Australian competition law does not prohibit a business from possessing substantial market power or using its efficiencies or skills to outperform its rivals.”

But the dominance of Google and Facebook does mean their behaviour should be scrutinised to see if it is harming competition or consumers.

To this end, the inquiry is focused on three potential areas of harm. First, the well-publicised issues of privacy and the collection and sale of users’ data.

Second, the digital platforms’ role in the advertising market, which is moving increasingly on line, where it’s estimated that 68¢ in every digital advertising dollar is going to Google (47¢) and Facebook (21¢).

And that’s not including classified advertising, the loss of which has been the biggest single blow to this august organ.

The pair sell ad space in their own right while also facilitating the advertising space sold by others, particularly the media companies. But the opacity of their algorithms and arrangements make it hard to know whether they favour their own ads over other people’s.

Advertisers say they don’t know what they’re paying for, where their ads are being displayed or to whom. This makes it harder for media companies to capture their share of advertising moving online.

Of course, higher costs for advertisers translate to higher prices for consumers.

Third is the digital platforms’ effect on the supply of news and journalism, the primary issue given to the inquiry.

Sims says newspapers and free-to-air radio and television are a classic example of a “two-sided market”. They serve consumers but, rather than charging them directly for the service as other businesses do, they cover their costs and profits by charging advertisers for access to their audience. (Newspaper subscriptions and cover prices accounted for only a fraction of their costs.)

Digital platforms aren’t just two-sided, they’re multi-sided. They, too, provide their services free, and charge advertisers, but also collect and sell to advertisers information about their users’ habits.

Google and Facebook select, curate, evaluate, rank, arrange and disseminate news stories. But they use stories created by others; they don’t create any news stories of their own. If they did, we could see this as no more than tough luck for the existing news media.

But as well as using the existing media’s stories to attract consumers and advertisers, about half the traffic on the Australian news media’s websites comes via Google and Facebook. So they have “a significant influence over what news and journalism Australians do and don’t see,” Sims says.

With the existing media having lost so much of its advertising revenue to the platforms, it’s not surprising they’ve had to get rid of at least a quarter of their journalists. There are a few new digital-only news outlets, but even they are having trouble making it pay.

Trouble is, news and journalism aren’t like most commercial products. They not only benefit the individual consumer, they benefit society as a whole. “Society clearly benefits from having citizens who are able to make well-informed economic, social and political decisions,” Sim says.

So news and journalism is a “public good” – if left to the profit-making private sector, not as much news and journalism will be supplied as is in the interests of society.

Public goods are usually paid for or subsidised by governments using taxpayers’ funds. If we want the benefits of Google and Facebook without losing the benefits of active, independent and challenging news media, taxpayers will have to help out.

Sims is canvassing several proposals before completing his final report. Since the former newspaper companies have realised they’ll never get much of a share of digital advertising, they’re now putting more hope in persuading their regular users to pay directly by buying subscriptions.

With the long-established attitude that everything on the internet should be free (or, at least, seem free), they’re finding it hard going.

That’s why I think Sims’ best suggestion is making personal subscriptions to the news media tax deductible, provided the outlet is bound by an acceptable code of conduct.